Know how to win friends and influence people? Advertisers want you to peddle their stuff to peers on Facebook and MySpace.

Internet start-ups out to crack the problem of advertising on social networks are developing ad technology that can analyze which people are most influential to their friends on social networks so that they can target those people with pass-it-on messages about Apple's latest iPhone or The Incredible Hulk movie.

The upstarts are basically scouting for the social-media equivalent of a Typhoid Mary who can spread a message, with effectiveness, to friends on sites like MySpace or Facebook.

Two such start-ups, SocialMedia Networks and 33Across, are on track to deliver those influencer services with the goal of becoming the advertising players of the social-media age--that is, if they can carefully navigate privacy concerns. Though they have different business models, their technology is part of a lineage of online ad targeting.

"We're trying to make ads suck less in social networks," said Seth Goldstein, founder of San Francisco-based SocialMedia Networks. (Are SocialMedia and 33Across on a collision course? Read more about 33Across here).

On Monday, Goldstein is expected to announce "social banners," or display ads that turn you or your friends into the hook of a marketing message. In tandem, SocialMedia will announce that it's developed a patent-pending algorithm called FriendRank to power those social banners. It's like Google's PageRank, but instead of ranking pages for their popularity, it ranks friendships.

The company looks at how people interact with Facebook or MySpace applications--those 5,000 widgets in its advertising developer network--to determine who, among someone's 100 or so friends, are most important to them. It might infer relationships by seeing who you've played Scrabulous with or turned into a vampire. (The company said that it works within Facebook's terms of service so as not to collect and store someone's profile data.)

"FriendRank basically helps us choose which friends to put in the ad," Goldstein said in an interview. Beyond that, he wouldn't describe the secret sauce behind the technology.

For example, instead of a banner advertising The Incredible Hulk movie, a social banner would ask which of your close Facebook friends, among a short list, you'd like to invite to see the movie. Or a social banner might inform you that a friend Jim just ranked Iron Man with three stars, and it might ask to "click here to buy tickets at Fandango."

Understanding people's relationships
Of course, online advertising has taken many shapes over the years, and this is just the newest twist. Companies have targeted Web ads to people's demographics, geographies, and behaviors. They've also targeted ads--and it's met with the most success--to keywords typed into the search box or the content of a story page. Those ad models are still in practice, but now that social networks are taking up so much of people's time, a new breed of advertising is taking shape.

"The next step is to understand people's relationships," said Martin Green, vice president of business at social instant-chat site Meebo. Last week, Meebo signed an ad partnership with Mountain View, Calif.-based 33Across to monitor the effect of advertising promotions from Universal Pictures. 33Across is helping Meebo understand which types of people--mavens or influencers--respond to which ads.

Certainly, everyone from Google to Facebook to widget makers is trying to figure out how to better sell ads on social sites, at higher rates than their lows of 5 cents per thousand impressions.

Despite the millions who regularly spend hours on social networks and sites like Flickr or YouTube, advertising spending in the category is worth less than $2 billion annually. (Projections from research firm eMarketer were recently downgraded because of an expected ad shortfall from MySpace.) That's less than 2 percent of the total advertising spending in the United States.

The problem with social advertising is twofold. People aren't very receptive to advertisements in the first place, but they're even less so when "hanging out" with friends virtually on MySpace or sending photos on Flickr. Traditional advertisers, the big spenders on commercials and brand advertising, are cautious when it comes to placing their logo next to racy or potentially inflammatory images. Technology and media companies must find a way around both of these issues.

"The lesson of Beacon was that people have no expectation that they will be linked to or targeted in any way outside of a social network."

--Leslie Harris, president, Center for Democracy and Technology

Goldstein, a veteran Internet advertising entrepreneur, founded SocialMedia in April of last year to initially be a widget developer for social networks. One of its first widgets, Appsoholic, measured how people respond to other applications on the site. With that data, the company realized that it would be better off helping other developers make money from their applications, given that the popularity of widgets can be fleeting.

So it built an automated ad system to sell banner, text, or Flash ads for as many as 5,000 applications running on Facebook, among others. SocialMedia advertisers can target people based on "appographic" parameters like people who've installed dating, car, or travel widgets.

Typical run-of-site banner ads on social networks can cost as little as 5 cents per thousand people they reach, or cost per thousand (CPM), and can go as high as 20 cents per CPM for targeted ads based on someone's profile or interests. Application ads can run as high as 50 cents, according to Goldstein, who's trying to break the dollar mark with social banners.

SocialMedia has tested social banners with BMW in a campaign worth more than $100,000. It created an application for the car company that allows people on Facebook to customize the features of a BMW 1 Series, or create a "dream ride." The related social banners, for example, advertised to Seth's closest friends in their news feeds that "Seth is taking a joyride in a BMW 1 Series on the Autobahn. Would you like to join him?"

SocialMedia's also been experimenting with the ads for Universal Pictures, among others. In early tests, the company has shown that people are 200 times more likely to respond to the social ad. (A non-social ad might command a click-through rate of 0.15 percent vs. a social banner at 0.5 percent.)

Possible privacy concerns
Still, with its social banners, SocialMedia could run into the same privacy concerns that Facebook encountered when it launched Beacon. Late last year, Facebook teamed with sites like eBay and Yelp so that when Facebook members performed an action on one of those sites, like buying a pair of shoes, Facebook would automatically alert their friends to it in their news feeds. After members reacted badly, the company backed off and made the program entirely opt-in for members.

SocialMedia isn't drawing data on people's behaviors from third-party sites, but it is using friendship data it collects to seed marketing messages. That could tick people off. Leslie Harris, president of the Center for Democracy and Technology, said the main issue with social ads like these is that people need to know how they're being targeted and be given the ability to opt out easily.

"People need to have clear notice and the clear opportunity not to participate," Harris said. "The lesson of Beacon (Facebook's controversial targeted-messaging project) was that people have no expectation that they will be linked to or targeted in any way outside of a social network."

Goldstein said SocialMedia will be sensitive to people's privacy, partly because of the backlash prompted by Facebook's Beacon program. People will be able to click a tab on a social banner to read about how it works and how to easily opt out of the program, he said.

At recent social-media conferences, Goldstein has said that programs like Beacon are the future of this type of conversational marketing.

"Technically people are collecting cookies all the time," Goldstein said. "What Beacon has shown us is that when you try to cross information between networks, the psyche isn't ready. But over the years to come you'll be able do this in any forum."